Over 40 first-time buyer? The options explained
The government has launched a number of housing and mortgage schemes to help Brits get on the property ladder as it recognises that homeownership is fast becoming a dream rather than reality.
But with its flagship Lifetime ISA scheme launched this tax year catering for ‘young people’ under the age of 40, coupled with research showing that it can take some first time buyers up to 27 years to save enough for a house deposit, individuals aged 40+ may feel there’s no hope.
We speak to three experts in the savings, mortgage and financial advice industries to find out what options are available and tips on maximising the chances of taking that first step onto the property ladder.
The options for your savings
Interest rates on savings accounts are at record low levels with the best easy access account paying a woeful 1.15%, while the best one year bond deal is 1.55%.
However if you are looking to become a homeowner in the next couple of years, there are ways to up your savings game plan to make your money work harder and maximise the returns.
Rachel Springall, finance expert at data site Moneyfacts, says spreading cash across high interest paying current accounts as well as regular savings accounts will ensure a healthy monthly sum is made towards building a deposit.
“Using a current account like an easy access account will also be ideal for those who may need access to their cash occasionally, whereas a fixed regular saver will be much more restrictive and typically requires regular deposits over a full year.”
However, she cautions that when using a current account as a savings vehicle, not all accounts are straightforward and some will have strict eligibility criteria, so savers need to be careful on how they plan to use the account.
These are Moneyfacts’ current best buys:
- Tesco Bank Current Account – 3% on balances up to £3,000. It requires £750 to be paid into the account each month and three direct debits need to be set up to be eligible for the interest. Tesco Bank recently revised this offer owing to “unprecedented demand” after originally guaranteeing 3% on £3,000 (up to 2019) but there was no minimum monthly payment amount needed or direct debit requirements.
- TSB Classic Plus – currently offers a £10 monthly reward incentive on top of its 3% credit interest rate on balances of up to £1,500. Again, this TSB offer has been revised from its previous offering of 5% on up to £2,000.
- Nationwide FlexDirect – offers 5% credit interest on balances up to £2,500 but it will require regular funding of £1,000 each month. The most important fact to remember with this account is the interest rate of 5% will drop after 12 months to 1%, so it may be worthwhile reviewing the account at this point.
Regular savings accounts
- Current account customers with HSBC, First Direct and M&S Bank can get a 5% regular saver account. Santander also offers 5% for its 123 credit and current account customers. The maximum investment amounts are as follows: HSBC £3,000, First Direct £3,600, M&S Bank £3,000, Santander £2,400.
- Saffron Building Society pays 3.5% on its fixed regular saver and it has a maximum investment level of £2,400.
A mortgage expert’s view
The Help to Buy ISA is a “no brainer” for savings according to Ray Boulger, senior technical manager at John Charcol. It is a scheme where savings are planned to be used as a deposit for a first home, providing the purchase price is not expected to exceed the maximum purchase price of £250,000 (or £450,000 in Greater London).
The maximum investment is £1,200 in the first month and then £200 per month up to a maximum of £12,000. The government bonus of 25% – subject to a minimum investment of £1,600 – is paid after exchange of contracts. If a couple are buying together, both can have a Help to Buy ISA, so a couple saving the maximum £24,000 would have a combined bonus of £6,000 and a deposit of £30,000.
Boulger says although the ISA will also attract tax-free interest, the tax-free 25% bonus is the main attraction. “It will take at least four years to save the maximum £12,000 but the ISA can be cashed in early if the FTB purchase takes place sooner,” he says.
Although mortgage rates for those with a 5% deposit have improved over the last year, a 10% deposit provides access to much lower rates and a wider choice of lender.
“House prices nationally have not moved much since June last year but are still rising in many of the cheaper parts of the country. Therefore, although saving a 10% deposit, rather than 5%, will mean a lower mortgage rate, if it means renting for longer rather than having one’s own home many FTBs will feel the higher mortgage rate is a price worth paying for owning their own home sooner,” he adds.
For anyone happy to consider a new build home the Help to Buy Equity Share second charge scheme can be used in conjunction with the Help to Buy ISA. This works on the basis of a normal 75% LTV mortgage plus a 20% equity loan from the government.
Boulger explains the latter is interest free for the first five years, after which a low rate of interest is charged, and when the property is sold the government takes 20% of the sale proceeds.
He says: “In effect, therefore, in exchange for providing 20% of the purchase price the government gets 20% of any profit or suffers 20% of any loss.”
The other benefit of this scheme is that because only 75% of the purchase price is borrowed from a normal first charge lender a mortgage rate close to the best rates in the market is available. The combination of this, and the fact that mortgage payments are only initially required on 75% of the purchase price, means that monthly payments are lower. This gives FTBs the option of paying less per month or buying a more expensive property for the same budget.
Boulger cautions anyone buying a new build house should make sure it is freehold and should avoid using a professional – such as a mortgage broker, solicitor or surveyor – recommended by the developer “because that would mean there was a conflict of interest,” he says.
See YourMoney.com’s How can Help to Buy help you? for more information.
A financial adviser’s view
The majority of people buying their first home tend to be about 30 years of age, according to Sean Irwin, independent financial adviser at DFP Wealth Management. However he anticipates that in the future, it may be more prevalent to see those aged 40+ who are yet to make a purchase of a first home, particularly in the south east where property prices are all but out of control.
He says while there is no right or wrong way to save for a first home. If someone has fallen short of meeting the Lifetime ISA criteria, the government’s Help to Buy ISA scheme may be beneficial as there are no age restrictions, just a strict requirement to be a first-time buyer. See YourMoney.com’s Help to Buy ISA: the facts for more information.
“One thing that can often be overlooked is making sure what they are saving up for matches the criteria. In order to get the government bonus, the purchase price of the house can be up to £250,000 or £450,000 in London, which in some areas of the country doesn’t get you much,” he says.
The other point to note is the maximum you can save each month is £200 (though in the first month you can deposit £1,200) and overall, you can put away a total of £12,000 where the government will add a £3,000 bonus. But Irwin says for those who may have more monthly disposable income, cash ISAs are an alternative, though interest rates are at record lows.
“The rates of interest seen at present often do not even match inflation so I can see the deterrent in investing here,” he says.
“There is the option also of taking out a stocks and shares ISA which could appeal to some as they now have the new annual allowance of £20,000, which would make it a great deal easier to save up for a decent size deposit over even a few years. However there are the added risks associated with the stocks and shares ISA and you should consult an independent financial adviser if you wish to pursue this avenue further as the monies can go down as well as up.”
See YourMoney.com’s A practical guide to moving from a cash to stocks and shares ISA for more information.